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Entitlements Rob Americans Of $51 Trillion

The Social Security Trustees recently released their annual report. As in years past, the ritual is likely to result in a lot of hand-wringing about how entitlement programs will eventually bleed the nation dry.

And, as in years past, it probably will fail to bring about any real reforms.

When you add it all up, this year’s Trustees’ report shows that today’s entitlement policies “threaten” to separate future generations from about $51 trillion of their money. If current laws are maintained through current generations’ lifetimes, these retirees will end up receiving $14.4 trillion more in Social Security benefits than they’ve paid in payroll taxes.

The corresponding estimate for Medicare’s three main programs — hospital insurance, supplementary medical insurance and prescription drugs — is $29 trillion, calculated for past and current generations as projected benefits net of premiums and trust funds. General revenue contributions are not netted out because those resources are not dedicated to Medicare.

But there’s more.

The payroll taxes we pay for Social Security are invested exclusively in U.S. Treasury securities, which means that instead of saving the Social Security surplus or expanding the nation’s future productive capacity, these funds are made available to lawmakers eager to “help the public” — and get reelected. Congress instantly dissipates the Social Security surplus, delivering all kinds of goodies and tax breaks to their constituents.

So additional taxes must be levied on future generations to make good on the system’s promises to current ones.

But that’s only a part of the explanation. Studies by Kent Smetters of the Wharton School and John Shoven of Stanford University estimate that instead of drawing down its debt, Congress dissipates almost $2 for each additional $1 of Social Security revenues it brings in.

Social Security’s trust funds thereby provide a “buy one, get two free” deal for us. For each $1 of extra Social Security taxes we pay, we get three things.

The first is a claim on future taxpayers’ earnings to fund our Social Security benefits.

The second: an additional $1 of public goodies today as the surplus is spent (more welfare, bigger corporate subsidies, more personal “tax expenditures,” bridges to nowhere, etc.).

Third, we get yet another $1 in goodies from the political tug-of-war over public resources. For a lawmaker, obtaining more for your own district, state or special interest groups requires your agreement to provide more to others’ constituencies as well.

What’s the total dollar amount involved in this “triple dipping”? Since past and current generations have paid surplus payroll taxes of $2 trillion (the current value of Social Security trust funds), one would think they would recoup about $6 trillion in benefits. But again, that’s not the end of the story.

By the Trustees’ estimates, the trust fund will increase to $3.8 trillion by 2021 in constant 2007 dollars. Thus, we will do even better: If current laws were maintained through 2021, past and present generations would gain an additional $7.6 trillion from Social Security’s trust fund mechanism.

Adding it all together yields $51 trillion: $14.4 trillion in present value of direct net benefits from Social Security, $29 trillion of direct net benefits from Medicare, and an additional $7.6 trillion of indirect and hidden triple dipping of the Social Security trust funds.

Medicare’s trust funds are zero, so they don’t warrant similar “triple dipping” calculations. Note also that none of the estimates used here involves “crazy” projections of entitlement shortfalls through the infinite future. These estimates extend only through current generations’ lifetimes — about 75 additional years for those aged 15 and older today.

Perhaps, however, they understand all too well that politicians’ largesse will deliver them $51 trillion in free money that future generations must pay for, and the bribe is keeping them quiet.

If the latter is true, it speaks volumes about our collective myopia. The question remains unanswered: Is a public policy that threatens to separate future generations from $51 trillion of their money consistent with maintaining their incentive to be productive and preserve a robust economy?